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Market Housing Issues, Problems and Solutions Stephen Nickell Chair of the National Housing and Planning Advice Unit Presentation at the Cabinet Office, 19 th May, 2008. Stephen Nickell is Warden of Nuffield College Market Housing What has been happening?

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Over the short term, house price inflation is dominated by the speed of the demand shift. Over twenty years, however, the rise in the stock is “big enough” to make a significant difference to the overall rise in house prices over this period, and hence to the average rate of house price inflation.

This means that house prices and house price inflation are, currently, more or less unaffected by construction costs. Note, current construction costs impact neither on the demand for houses nor on the existing stock.

If construction costs go up while house prices remain unchanged, land prices (ie. the price of land with planning permission) will fall.

First, the rise in planning restrictions will slow the rate at which the housing stock increases, raising the overall rate of house price inflation in the medium term.

Second, reducing the supply of “expensive” (large) houses will raise their price, forcing better-off households into the “small home” sector where they will compete with less well-off households. This may well drive up the price of “small” homes despite the increase in supply.

Overall this policy is quite likely to reduce the housing prospects of the less well off.

The key point to recognise is that this can only help FTBs if the supply of FTB type houses is higher than it otherwise would be.

Initially the demand for FTB type houses rises and with constant supply, their price rises by the amount of the tax cut. So the tax cut goes straight to the existing owners of FTB houses.

This price will bring forth increased supply only if keen landowners/house builders can persuade planners to release more building land. Unlikely. So aside from some, probably tiny, composition effects, no other changes will ensue.

From 1997 to 2006, real house prices have more than doubled. Real earnings have increased by around 15%.

The ratio of (lower quartile) house prices to (lower quartile) earnings has risen from around 4 in 2000 to over 7 today.

From 1996 to 2001, housebuilding was at a rate of around 135K per annum, households increased at around 159K per annum.

From 2001 to 2006, housebuilding was at a rate of 146K per annum, households increased at around 199K per annum. Incidentally, this rate of housebuilding adds around 1% of England to urban areas every 20-50 years depending on use of brownfield/density.

Households are now rising at over 210K. Net migration represents around one third. Increasing life expectancy and behavioural changes continue to lower household size.

Overall, the PRS in England represents around 2.7 million dwellings which is around 13% of the overall housing stock.

At the low point, in the late 1980s, the PRS was just over 2 million dwellings, around 10% of the stock. Buy-to-let (BTL) mortgages were introduced in 1996. In 1988 and 1993, there were changes in legislation which made the PRS more attractive to investors.

Interestingly, the size of the PRS rose at least as rapidly from the late 1980s to 1996 (when it represented around 2.4 million dwellings) as it did from 1996 to the mid 2000s.

The introduction of BTL mortgages had two effects. First, it raised the supply of rented property and hence lowered rents (below the level they would have reached otherwise).

Second, it raised the overall level of demand for residential property (demand by those who want property to rent out plus demand by owner-occupiers).

Note, however, that the fall in rents will have reduced the demand for residential property by owner-occupiers. Nevertheless, it is plausible that the overall demand for residential property rose despite this offsetting effect.

The upshot would have been that the rise in BTL mortgages contributed to the rise in residential property prices.

The fundamental question is: to what extent can the dramatic rise in house prices over the last decade be attributed to the BTL phenomenon?

Our estimates suggest that the contribution of BTL is small. From the mid 1990s, the real price of houses has risen by around 150%, which is around 8.6% per annum. If BTL mortgages had not been introduced, we estimate that the rise in real house prices would have been a little over 130%, which is around 7.9% per annum. So BTL has added an estimated 0.7% per annum to the inflation rate of real house prices.

Household projections suggest that the number of households in England will grow by an average of around 223K per annum over the next 20 years. This rate is significantly higher than in the recent past. Furthermore, projected growth up to 2020 is even faster at an average of around 230K per annum.

168K new homes were completed in 2006-7.

The fact that the rate of completion of new homes has been well below the rate of formation of new households means there is a large build-up of unsatisfied demand.

The evidence suggests that over the long-term, a 1 per cent rise in real incomes raises house prices by 2 per cent if the housing stock remains unchanged.

If the housebuilding plans currently embodied in the draft RSS plans (around 200K p.a.) are fulfilled, house price to earnings ratios are likely to rise from around 7 to around 10 over the next twenty years.

If Green Paper plans (reaching 240K p.a. by 2016, 3m. new homes by 2020) are fulfilled, house price to earnings ratios are likely to rise to around 9.5 over the next twenty years. This may be reduced significantly by biasing new homes towards more expensive regions and even further by some bias towards larger family homes which are in shortest supply.

NHPAU projections indicate that a plan to reach 270K new homes p.a. by 2016 would come close to stabilising affordability in the long run.

Section 106 payments. These are made by developers to LAs as a condition of planning permission. The idea is for the LA to negotiate some community benefit such as infrastructure, open space (including a proportion of low cost homes in the development). These have high transaction costs and as a proportion of the “planning gain”, they are trivial, generating no serious financial incentive for development.

Housing and Planning Delivery Grant (HPDG). This is a reward payment to LAs for delivering land for development and delivering housebuilding relative to plans. Overall, the amounts are small and are not likely to generate strong incentives.

Community Infrastructure Levy (CIL). This is proposed and out for consultation. Could replace Section 106 but that is not proposed. This allows LAs to apply a levy (per roof or per square metre) on all new developments. This is to provide for infrastructure, widely defined. So LA assesses infrastructure requirements and, after consultation, publishes a charging scheme, the levy being paid at the outset of development. The incidence of this tax is on the landowner. It should differ between greenfield/brownfield and across areas. Cannot be used for general LA expenditure, nor to remedy existing infrastructure deficiencies, unless aggravated by new development.

Allow CIL incentives to work. CIL rates can be much higher in areas where the difference between the value of land with permission and its alternative use value is much higher. These high value areas are around certain towns in SE/E, eg. Oxford, Cambridge. The green belt is important here.

Remove brownfield and density targets. Note urban back gardens are brownfield sites! People like living in houses with gardens, indeed in urban sprawl!